Regional Regulatory Initiatives Addressing GHG Leakage in the USA

Abstract

This chapter, from a monograph on climate change and European emissions trading, considers regional regulatory initiatives addressing greenhouse gas (GHG) leakage in the United States. The author uses regional efforts to combat climate change within the U.S. as a way to gather information about the design of effective regional GHG emissions trading schemes outside the U.S. A variety of states and localities have taken it upon themselves to impose mandatory GHG caps in their jurisdictions, with the goal of inducing action by the national government. The chapter describes some of the major regional GHG cap-and-trade initiatives in the U.S., defines the problem of emissions leakage in the context of regional GHG regulation, identifies the various approaches employed by the regional GHG cap-and-trade regimes in the U.S. to address leakage, and offers some basic conclusions about the design of regional GHG regimes outside the U.S., notably in the European Union (EU). In the eastern U.S., leakage is of minimal concern, given the modest emissions cap and cost of compliance, relatively minor electricity price differentials, relative uniformity of GHG emissions from generators, and other factors. In contrast, electricity generated in the western region (Western Climate Initiative states) and California has a relatively low GHG emission rate compared to neighboring jurisdictions. California, because it is a significant importer of electricity, is particularly concerned with emission leakage resulting from a GHG emission reduction regime. The authors conclude that determining whether allowance auctioning is an appropriate method of allocation will depend on the reach of the regime, the competitiveness of the industries affected, and the cost of technologies required to comply with the new emissions targets. The regimes undertaking cap-and-trade programs have demonstrated that there exist a number of policy tools to address leakage in a non-discriminatory manner. For example, the EU and other nations may be able to control leakage by establishing load-based GHG allocations for imported products.